FeaturedNationalVOLUME 18 ISSUE # 16

Light at the end of the tunnel?

The rupee has started stabilizing after the government accepted all pre-conditions of the International Monetary Fund for its bailout package. Pakistan’s foreign reserves are also expected to swell. The country is expected to benefit from increasing economic activity in China after pandemic restrictions. According to national and international estimates, inflation will also decrease gradually. These are good signs for Pakistan and its people.

Pakistan has been facing a serious current account problem for decades. It faces a shortage of dollars whenever it starts progressing. In a positive development, Pakistan’s current account deficit shrank by 90.2pc to $0.24 billion in January from $2.47bn in the same month last year. According to the State Bank of Pakistan (SBP), the deficit decreased by 16.55pc as compared to December’s $0.29bn. The latest data shows that the country’s current account deficit during the first seven months of the current fiscal year stood at $3.8bn, which equates to a decline of 67.13pc compared to July-Jan FY22.

In its latest monthly “Economic Update and Outlook” report, the Finance Ministry expects increased economic activity in Pakistan after the opening up of China following new Covid restrictions. “China has finally lifted pandemic restrictions and resumed mobility and this will result in a pickup of economic activity and provide momentum to the international economy. International financial institutions predict that China will account for one-third of international growth during the current year. The largest beneficiaries from China’s rebounding will possibly be the oil exporters and its Asian neighboring countries, according to Goldman Sachs. Only China’s yearly food imports are almost $266 billion which are expected to increase over the years,” it added.

Pakistan can benefit from the significant and enhanced consumption patterns of the food sector within the Chinese economy. Pakistan is a home to the Chinese flagship initiative, i.e., CPEC. This initiative slowed down during the previous government, and it is high time to revive the programme to put Pakistan on the trajectory of sustainable development by connecting Pakistan to 150 markets worldwide through the BRI. The report stated that during the first half of FY2022-23, total revenues grew by 18.8pc to reach Rs4,699 billion against Rs3,956 billion in the same period of last year. The major contribution to this growth came from a 26.4pc increase in non-tax collection, while tax collection has also shown remarkable performance by posting a growth of 17pc during the first half of the current fiscal year.

Total expenditures grew by 19.8pc to Rs6,382 billion in July-Dec FY2023, against Rs5,328 billion in the same period last year. Current expenditures increased by 30pc to Rs6,061 billion in July-Dec FY2023 against Rs4,676 billion in the comparable period of the last year. Foreign Direct Investment (FDI) reached $683.5 million during Jul-Jan FY2023 ($1,224.7 million last year) decreasing by 44.2pc. Foreign Public Portfolio Investment recorded a net outflow of $1,010.9 million compared to an inflow of $958.3 million during the same period last year. Total foreign investment during Jul-Jan FY2023 recorded an outflow of $341.4 million as against an inflow of $1,875.4 million last year.

The ministry maintained the stabilisation policy of the government had succeeded in improving the current account deficit by 67pc reduction during the first seven months of the current fiscal year whereas the non-markup current expenditures are also significantly reduced to contain the fiscal deficit. During the first half of the current fiscal year, interest payments on the government’s debt significantly contributed to the total expenditures, which can limit the government’s fiscal space to carry out its normal operations, investments, social and structural policies if the trend continues. A couple of weeks ago, the market was corrected to minimize the difference between interbank and open market exchange rates whereas more recently, it was corrected by 5pc appreciation of the Pakistani rupee given its economic fundamentals.

According to Goldman Sachs, the reopening of China and an economic recovery in Korea could shift the center of gravity in Asian stock markets to the north, away from India and ASEAN countries. Its research report says the shift has already started with north Asia’s strong equity market performance at the start of the year and could gather further momentum towards midyear as rate rises peak, markets begin to anticipate a global growth rebound in 2024, and the US dollar continues to weaken. At the market level, this may manifest in an improvement in regional earnings growth from 4pc this year to 16pc next. Investors have started to “pre-trade” this anticipated improvement and may consider taking more risk as the macro outlook improves. According to the report, two big factors are at play: the timing of the US Federal Reserve in easing its rate-hike policy and the reopening of China after relaxing its strict “zero-COVID” policy. The authors also note that while the dollar is likely to strengthen over the next three to six months, they expect it to peak toward the middle of the year and then weaken into the end of it. That would augur well for stocks in Asia-Pacific, they conclude, because historically there has been a strong inverse correlation between the US dollar and regional equity performance.

According to the researchers, the MSCI China index has rallied 55pc since it bottomed on October 31, 2022, but the market still has further room to appreciate. Moreover, it says what they’re seeing in China is more than what’s been described as simply “China reopening.” “The current market rally is not just a consumer and services recovery trade (as it would be if it were only about reopening),” they write, “but a more broad-based growth rebound spanning a wide range of industries.” With that in mind, they’ve raised their earnings-growth projection in China to 17pc for 2023, up from an earlier estimate at the end of 2022 of 13pc.

It is expected that the situation will change at the national and international level to benefit the people of Pakistan. Prices of food are also expected to come down after recovery from the recent floods and better agriculture production.